5.4 Liabilities and Instruments Classified in Equity

When a liability or an instrument classified within an entity’s stockholders’ equity is measured at fair value, it is assumed that the liability or equity instrument is transferred to a market participant on the measurement date. Specifically, ASC 820-10-35-16 requires entities measuring the fair value of a liability to assume that the liability remains outstanding and is transferred to a market participant transferee that “would be required to fulfill the obligation.” Similarly, entities must assume that an “instrument classified in . . . shareholders’ equity would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument.” A liability being measured at fair value would not be assumed to be settled, and an instrument classified in shareholders’ equity would not be assumed to be canceled or otherwise extinguished. However, ASC 820-10-35-16B points out that “[w]hen a quoted price for the transfer of an identical or a similar liability or [an entity’s own equity instrument] is not available and the identical item is held by another party as an asset, a reporting entity shall measure the fair value of the liability or [the entity’s own] equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.” See Section 10.2.7 for further discussion of the fair value measurement of liabilities and equity instruments.